All business: Dollar slumps despite Bush's strong-dollar policy

RACHEL BECKAP Business Writer

Published Saturday, December 27, 2003

NEW YORK (AP) -- That strong-dollar policy the Bush administration keeps touting sure doesn't look so strong right now.

The dollar has been tumbling against other major currencies lately. Its steep decline has come despite lots of good news about the U.S. economy, which many think should be reason enough for the dollar to start staging a comeback.

Of course, some weakness isn't necessarily a bad thing, namely for U.S. manufacturers and companies doing business abroad. But if it lingers for too long, it could spell big trouble.

The dollar has been falling to new lows almost daily against the euro, the currency that represents 12 European nations. So far this year, the dollar has lost more than 18 percent of its value vs. the euro and about 10 percent against the Japanese yen.

What a change that is from just a few years back, when the seemingly unstoppable dollar was considered the world's favored currency thanks to the booming U.S. economy and stock market.

For most of the 1990s, the U.S. government supported a "strong dollar" policy, so it would continually take steps to bolster the currency. That often meant buying dollars in foreign-exchange markets to stem its slide vs. other major currencies.

While the Bush administration says it supports a strong dollar, it has certainly taken a laissez-faire approach. President Bush, at a news conference earlier this month, stressed that the dollar's value should be set by the market, while U.S. Treasury Secretary John Snow has said that he thinks the dollar's recent decline has been orderly.

"We have a strong-dollar policy, which is, in our judgment, good for the economic vitality of this country," Bush said.

But the dollar is anything but strong right now, which might not matter for the short-term but could produce some havoc should it stay that way.

A weak dollar makes U.S. goods less expensive abroad, which can boost demand for U.S. products and services because they may be cheaper than what is produced in other countries. And it raises prices for imports here, which gives U.S. manufacturers some pricing power because they don't have to discount in order to compete.

It also gives corporate profits a nice tail wind. U.S. companies that do business abroad eventually have to convert their money back to dollars when calculating their earnings. So when foreign currencies are strong, profits from abroad count for more than they otherwise would.

But a continued slump in the dollar could eventually hurt U.S. financial markets and the economy because it could easily curb foreigners' interest in dollar-denominated investments -- and we need their money to cover shortfalls in United States' ballooning budget and trade deficits.

"The risk of tolerating a weak dollar is that the market may lose confidence in the currency and it can make it more difficult for the U.S. government and the corporate sector to attract interest from foreigners," said David Gilmore, partner in the Essex, Conn.-based research firm Foreign Exchange Analytics.

The weak dollar could also be inflationary. For instance, OPEC said earlier this month that it may cut production to protect itself from the falling dollar, which could boost oil prices. And non-oil import prices are now rising modestly, climbing 1.1 percent in November compared with a year earlier, when they had dropped slightly.

In addition, the dollar's slump and the euro's gains could start hurting European exports, which could crimp the global economic recovery.

The good news is that we aren't a danger zone yet. Right now, investors are just slowing the amount of new money they put toward the dollar-based investments.

The situation would turn more serious if they stop investing altogether. Let's hope that it doesn't come to that.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org